Research Article

DOI :10.26650/ISTJECON2020-0010   IUP :10.26650/ISTJECON2020-0010    Full Text (PDF)

High Cost of Venture Capital and Investment Strategy Startups Should Follow

Mustafa Şeref Akın

In this article, the mathematical expansion of the share that the venture capital investors should receive to meet their expectations is shown. After the initial phase has been overcome, the entrepreneurs’ acquaintances around them are insufficient in meeting the capital requirement. For this reason, founders sell some of their resources to other investors who expect a return on investment. In this sense, the support of venture capitalists is critical during the growth phase of the startup. The most crucial dilemma here is how much financing and how many shares will be given. Due to the organizational structure of venture capital and the low success rate in start-ups, it is a costly capital. Expectation rates of investors are not much above the general market ones. The factors that make venture capital so costly are the long waiting period of 5-10 years, and the chances of start-up success being between 10-20%. As a result, the discount rates are well above 50%. Entrepreneurs are disappointed when they give too many shares for little capital. Under these circumstances, the most accurate strategy a start-up can follow is to provide as much financing as needed rather than to negotiate tightly with venture capitalists.

JEL Classification : G24 , M13
DOI :10.26650/ISTJECON2020-0010   IUP :10.26650/ISTJECON2020-0010    Full Text (PDF)

Risk Sermayesinin Yüksek Maliyeti ve Startuplar’ın İzlemesi Gereken Yatırım Stratejisi

Mustafa Şeref Akın

Bu çalışmada risk sermayesi yatırımcılarının beklentilerini karşılamaları için almaları gereken hisse oranlarının matematiksel açılımı gösterilmektedir. Başlangıç safhası atlatıldıktan sonra, sermaye ihtiyacını karşılamada girişimcinin etrafındaki tanıdıkları yetersiz kalmaktadır. Bu nedenle, startup kurucuları öz kaynaklarının bir kısmını yatırım getirisi bekleyen diğer yatırımcılara satarlar. Startuplar’ın büyümeye geçme aşamasında risk sermayedarlarının desteği bu anlamda kritiktir. Buradaki en önemli açmaz ne kadar yatırıma ne kadar hisse oranı verileceği yönündedir. Risk sermayesinin organizasyon yapısı ve startuplar’daki başarı oranının düşük olması sebebiyle, maliyeti yüksek bir sermayedir. Yatırımcıların beklenti oranları genel piyasa beklentilerinin çok üstünde değildir. Risk sermayesini pahalı yapan unsurlar 5-10 yıl arası değişen uzun bekleme dönemi ve startup’ın başarılı olma ihtimalinin %10-20 arası değişmesidir. Bundan dolayı indirgeme oranları %50’lerin çok üstüne çıkmaktadır. Genellikle startup girişimcisi çok az sermaye karşılığında çok fazla hisse vermiş gibi bir hayal kırıklığı yaşamaktadır. Bu az sermayenin arkasındakinin risk sermayesini göstererek bu oranların bir pazarlık konusu veya bir sömürüden çok sektörün kurgusunun neticesi olduğunun anlaşılmasıdır. Bu şartlarda, startup kurucularının izleyebilecekleri en doğru strateji risk sermayedarlarıyla sıkı pazarlık etmek yerine gerektiği kadar finansman sağlamalarıdır.

JEL Classification : G24 , M13


A startup starts with the opportunity of potential economic gain. It must have supportive resources (financing, management) to take advantage of the opportunity in a competitive and uncertain environment. Bank loans require regular cash flows, and therefore, startups cannot access debt financing. Banks also demand mortgages in return for credit. In the initial funding, the entrepreneur, himself, his friends and relatives play an essential role. After the initial phase, the entrepreneur’s acquaintances around him are insufficient in meeting the capital requirement. For this reason, startup founders sell some of their resources to other investors who expect a return on investment. The most crucial dilemma here is in terms of how much investment will be given for how much share. Does this have a methodology? How does it handle the math? What are the strategies that startup founders should follow?

Usually, the startup entrepreneur is disappointed if he has given too many shares in exchange for very little capital. Sometimes they reject the offer. In this article, the organization and financial structures of venture capital are covered. It is shown that these calculations are the result of the sector’s foundation rather than a bargaining issue or exploitation. 

Due to the high uncertainty for both parties, it is difficult to determine the true value of newly established startups. Often, the younger the startup, the more historical data is missing, and the higher are the uncertainties that affect future performance which make it difficult to appreciate the company.

Venture capital is the capital of an entrepreneurial group from other individuals and institutions. Risk capital entrepreneurs are called limited partners, as they only provide money. Limited partners are pension funds, endowments, companies, and wealthy people.

General partners are those working in venture capital firms. They make investment decisions and use capital from limited partners or their own resources.  

The contract between partners is usually for ten years. This period can be divided into three parts. The new investment is made in the first period. In the second period, there are some new investments or additional investments to the existing investments, and in the third period, exists are realized. On average, 10 to 15 investments are made. Many of them fail.

Venture capital is an expensive financial instrument. The discount rate used by risk capitalists is much higher than the standard project evaluation discount rates. In particular, the effect of this reduction rate is observed in the high shareholding demanded against investment.

There are two main factors behind the discount rate: the setup of venture capital firms and the risk of ventures. Venture capital uses other people’s money for a long time. Limited partners are waiting for a return by adding to this waiting period.

The industry average is that one or two out of 10 investments are successful. Thus, the success rate (P) varies between 10% and 20%.

On the left side of Equation 1, there are capital (cash inflow), expectation returns (r) and time (T) of the fund. On the right side, is shown the probability of the startup firm to be successful and the income to be earned (cash out).

Cash Int * (1 + r) ^ T [Expected return of limited partners] = P × Cash Out [Expected result] (1)

There is a cash-to-cash (c-c) ratio when the amounts of cash are placed on the left side of the equation and the discount rates on the right side (equation 2).

Cash Out / Cash In = = (1 + r) ^ T / p (2)

The ratio of cash outflow (earnings) to cash inflow (cost) is 1 plus the time over return is divided by the probability of success. It also shows how much cash should be issued against each deposit.

As an example, there should be a cash-to-cash recycling rate based on investors’ expectations and success.

If the return expectation rate of investors is (r) = 0,1, 1 year is expected (t), the probability of success is 0,1 (p), it is necessary to withdraw cash from the sale of the starting firm of 11 TL against the cash inflow of 1 TL. For example, if two years is expected (t), 12,1 TL is required. If a 5-year exit strategy is foreseen, a cash outflow of 16,1 TL is required against the 1 TL set. The main reason for being extremely high, such as 11, 12, 16 times, is due to the low probability of success (P). If the success rate (P) is increased by 20%, the cash to cash rates required in the same example are reduced to 5,5, 6, and 8 times, respectively. 

In this case, the area that can be in the price negotiation with the fund, which must meet the expectations of the investors, is narrow. The venture capital fund is not an exit. The startup founders should ask only a sufficient amount of capital.

PDF View


  • Amit, R., L. Glosten & Muller, E. (1990). Entrepreneurial ability, venture investments, and risk sharing. Management Science, October, 1232-1245. google scholar
  • Berkus, D. (2016). After 20 years: Updating the Berkus method of valuation, Retrieved: May 11, 2017, from google scholar
  • Blank, S. (2013). Why the lean start-up changes everything. Harvard Business Review, 4(2), 34-40. google scholar
  • Bulut, H, Er, B. (2010). Risk sermayesi destekli girişimlerin fiyatlandırılması ve fiyatlandırmada kullanılan ıskonto oranı, Atatürk Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, 11(1), 275-297. google scholar
  • Chiampou, G. E. & Kallett, J. L. (1989), Risk/return profile of venture capital. Journal of Business Venturing, 4(1), 1-10. google scholar
  • Cochrane, J. (2005). Financial markets and the real economy. NBER Working Papers, 11193. google scholar
  • Cumming, D. & Dai, N. (2011). Fund size, limited attention and valuation of venture capital backed firms. Journal of Empirical Finance, 18, 2-15. google scholar
  • Damodaran, A. (2010). The dark side of valuation: Valuing young, distressed, and complex businesses. New Jersey: Pearson Education. google scholar
  • Engel, D. & Keilbach, M. (2007). Firm-level Implications of Early Stage Venture Capital Investment: An Empirical Investigation. Journal of Empirical Finance, 14, 150-167. google scholar
  • Fernande, P. (2007). Company valuation methods. The most common errors in valuations. IESE Working Paper No. 449, Navarra. google scholar
  • Festel, G. Wuermseher, M. & Cattaneo. G. (2013). Aluation of early stage high-tech start-up companies. International Journal of Business, 18(3), 216-231. google scholar
  • Fried, V.H. ve Hisrich, R.D. (1994). Towards a model of venture capital investment decision making. Financial Management, Autumn, 28-37. google scholar
  • Goldman, M. (2008). Valuation of startup and early-stage Companies. The Value Examiner. July-August. google scholar
  • Gompers, P. (1999). A note on valuation in entrepreneurial ventures. Harvard Business School, Case 9298082: 1–17. google scholar
  • Gompers, P., A. Kovner, J. Lerner & Scharfstein, D. (2010). Performance persistence in entrepreneurship, Journal of Financial Economics, 96, 18-32. google scholar
  • Hochberg, Y. V., Ljungqvist, A. & Lu, Y. (2010). Networking as A barrier to entry and the competitive supply of venture capital. Journal of Finance, 65, 829-859. google scholar
  • Hsu, D. H. (2004). What do entrepreneurs pay for venture capital affiliation? Journal of Finance, 59, 1805-1844. google scholar
  • Hsu, D. H. (2007). Experienced entrepreneurial founders, organizational capital, and venture capital funding. Research Policy, 36, 722-741. google scholar
  • Kanniainen, V. & Keuschnigg, C. (2003). The optimal portfolio of start-up firms in venture capital finance. Journal of Corporate Finance, 9(5), 521-534. google scholar
  • Kovner, C. T., Brewer, C. S., Greene, W. & Fairchild, S. (2009). Understanding new registered nurses’ intent to stay at their jobs. Nursing Economics, 27(2), 81Y98. google scholar
  • Ledyard, J. (2008), Market Failure in Durlauf, S. and L Blume (eds). The New Pal-grave Dictionary of Economics, 2nd ed. Baasingstroke: Macmillan. google scholar
  • Lerner, J. (1994). The syndication of venture capital investments. Financial Management, Autumn, 16-27. google scholar
  • Lerner, J. (1995). Venture capitalists and the oversight of private firms. Journal of Finance Literature, 301–318. google scholar
  • Maxwell, A. L. Jeffrey, S.A. and Vesque, M. L (2011). Business angel early stage decision making. Journal of Business Venturing. 26, 212-225. google scholar
  • Moyen, N., Slade, M. E. & Uppal, R. (1996). Valuing risk and flexibility - a comparison of methods. Resources Policy, 22, 63-74. google scholar
  • Robinson, D. (2020). How VCs Value Businesses? in Startup Valuation Methods Course with Manuel Adelino, Duke University. Erişim adresi: google scholar
  • Robinson, R. (1987). Emerging strategies in the venture capital industry. Journal of Business Venturing, 2, 1, 53-77. google scholar
  • Ruhnka J. C. & Young, J. E. (1991). Some hypotheses about risk in venture capital investing. Journal of Business Venturing, 6(2), 115-133. google scholar
  • Sahlman, W. A. (1990). The structure and governance of venture capital organizations. Journal of Financial Economics, 27, 473-521. google scholar
  • Scherlis, D. & William, S. (1989). A method for valuing high-risk, longterm investments. Harward Business School, Note: 9-288-006, pp: 1-54. google scholar
  • Villalobos, L. (2007). Investment valuations of seed- and early-stage ventures. eVenturing. google scholar
  • Vinturella, J. B. & Erickson, S. M. (2004). Raising entrepreneurial capital. Academic Press, Waltham. google scholar
  • Weidig, T. & Mathonet, P. (2004). The risk profile of private equity. SSRN, 495482. google scholar


Copy and paste a formatted citation or use one of the options to export in your chosen format



Akın, M. (2020). High Cost of Venture Capital and Investment Strategy Startups Should Follow. Istanbul Journal of Economics, 70(1), 229-245.


Akın M. High Cost of Venture Capital and Investment Strategy Startups Should Follow. Istanbul Journal of Economics. 2020;70(1):229-245.


Akın, M. High Cost of Venture Capital and Investment Strategy Startups Should Follow. Istanbul Journal of Economics, [Publisher Location], v. 70, n. 1, p. 229-245, 2020.

Chicago: Author-Date Style

Akın, Mustafa Şeref,. 2020. “High Cost of Venture Capital and Investment Strategy Startups Should Follow.” Istanbul Journal of Economics 70, no. 1: 229-245.

Chicago: Humanities Style

Akın, Mustafa Şeref,. High Cost of Venture Capital and Investment Strategy Startups Should Follow.” Istanbul Journal of Economics 70, no. 1 (Sep. 2023): 229-245.

Harvard: Australian Style

Akın, M 2020, 'High Cost of Venture Capital and Investment Strategy Startups Should Follow', Istanbul Journal of Economics, vol. 70, no. 1, pp. 229-245, viewed 25 Sep. 2023,

Harvard: Author-Date Style

Akın, M. (2020) ‘High Cost of Venture Capital and Investment Strategy Startups Should Follow’, Istanbul Journal of Economics, 70(1), pp. 229-245. (25 Sep. 2023).


Akın, Mustafa Şeref,. High Cost of Venture Capital and Investment Strategy Startups Should Follow.” Istanbul Journal of Economics, vol. 70, no. 1, 2020, pp. 229-245. [Database Container],


Akın M. High Cost of Venture Capital and Investment Strategy Startups Should Follow. Istanbul Journal of Economics [Internet]. 25 Sep. 2023 [cited 25 Sep. 2023];70(1):229-245. Available from: doi: 10.26650/ISTJECON2020-0010


Akın, Mustafa Şeref. High Cost of Venture Capital and Investment Strategy Startups Should Follow”. Istanbul Journal of Economics 70/1 (Sep. 2023): 229-245.


Published Online30.06.2020


Attribution-NonCommercial (CC BY-NC)

This license lets others remix, tweak, and build upon your work non-commercially, and although their new works must also acknowledge you and be non-commercial, they don’t have to license their derivative works on the same terms.


Istanbul University Press aims to contribute to the dissemination of ever growing scientific knowledge through publication of high quality scientific journals and books in accordance with the international publishing standards and ethics. Istanbul University Press follows an open access, non-commercial, scholarly publishing.